What is Corporation Tax?

Corporation Tax is a tax which is levied on the profits earned by the companies. Corporation tax is also known by other names like corporate tax or Company tax. Different countries have different corporate tax rates. This tax may be imposed at the national, state or local level. This tax may also be called as Income tax or capital tax. Rules regarding corporate tax vary greatly around the world. A countries corporate tax may be levied on:

Companies doing business in the country on income from that country

Companies incorporated in the country

Foreign companies who are permanently established in the country

Income on which corporate tax is imposed is determined much likely the income of an individual taxpayer. Generally, the tax is levied on net profits of the company. But this calculation of profit may differ as there are different rules regarding this in different countries. Some companies may be exempted from tax and some may be charged higher than the normal corporate tax. Since companies are artificial persons considered different from their owners, they are taxed as if there were people.

What is Corporate Income Tax?

This is just another name of corporate tax. What is corporate income tax rate? This is the rate at which companies are charged with corporate income tax. Different countries have different corporate tax rates. Most of the countries exempt certain type of companies from paying tax.

What is the Corporate Tax Rate in the US?

In US, Corporate Tax Rate varies from 15% to 35%. Some corporate transactions are not taxable in US like mergers, acquisitions and liquidations. Shareholders are charged with tax before they are paid their dividend. They get the share of their dividend after deducting the tax from that. In 2014, US had the highest corporate tax rate in the world that is, 39.1%. Corporate tax is imposed in US at the federal, state and local levels.

What is the Corporate Tax in India?

In India, Corporate Tax is imposed on both foreign and domestic companies. As all the individuals are supposed to pay tax to the government, the companies are also supposed to pay tax to the government which is called corporate tax. In India, for domestic companies corporate income tax rate is charged as follows:

25% is charged on all the domestic companies

Of the company’s turnover exceeds Rs1 crore in a financial year, a surcharge of 5% is levied in the income

3% education cess is also levied on every domestic company

Corporate income tax is also levied on those companies which have the global earnings.

For the foreign companies, tax rate depends upon the tax agreement between home country government and foreign country government.

What is Form 1120?

This is one of the IPS tax forms used by the companies in US to report their income, gains, losses, deductions, credits and to figure out their tax liability. There are corporate income tax calculators available online. We just have to fill our details in that and our tax will be calculated.

Deferred Tax

In this, we are talking about that asset which is used to reduce the income tax in the future time period. A deferred tax asset is that asset shown in the balance sheet which shows that the company has overpaid some taxes in advance which it doesn’t have to pay later on. Once the company paid these taxes before their due date but later on these paid taxes are eventually returned to the company in the form of tax relief. That is why the overpayment of tax is considered as an asset of the company. Deferred asset can occur due to the recognition of taxes at different times by the company and tax authorities. Is depreciation a deferred tax asset? Depreciation on fixed assets is a common situation that gives rise to deferred tax liability not a deferred tax asset. This occurs because in tax laws, MACRS (modifies accelerated cost recovery system) method of depreciation is allowed while most of the companies use straight line method of depreciation.

Example of the Deferred Tax Asset Calculation

Year 1 Income Statement

Revenue

$3,000

Warranty Expense

$00

Taxable Income

$3,000

Taxes Payable

$900

Net Income

$2,100

Year 1 Tax Authority

Revenue

$3,000

Warranty Expense

$00

Taxable Income

$3,000

Taxes Payable

$900

Net Income

$2,100

Deferred tax liability is an account in the company’s balance sheet which shows the tax which is to be paid in future. This occurs as a result of the difference between company’s accounting and tax carrying values, the anticipated and enacted income tax rate and estimated taxes payable for the current year. This shows that the company has to pay more income tax in future due to the transaction that took place during the current year. Because of the difference between the US tax laws and accounting rules, a company’s profits before taxes shown in the income statement can be greater than the company’s taxable income on tax return which gives rise to the increase in deferred tax liability on the liability side on the company’s balance sheet.

What is a deferred Income Tax?

This the deferred tax liability only which is shown in the liability side of the balance sheet. This liability occurs due to the difference between the income recognition between the company’s accounting method and tax laws. Total tax paid by the company may be different from the tax liability owned to the IRS as the company follow the different accounting methods and rules. This situation arises when the income tax payable is greater than the income tax expense paid and shown in the income statement. If the income tax payable is less than the income tax actually paid and shown, then deferred tax asset account is created.

Is deferred tax asset a current asset?

Yes, this is a current asset which is shown in the balance sheet in asset side.

Calculation of deferred tax liability and deferred tax asset is quite easy. We just have to see that the accounting income is less or more than taxable income and how much is the difference between them. If the accounting income is less than taxable income, then the difference between them is considered as the deferred tax asset and if the accounting income is more than taxable income than the difference will be shown as deferred tax liability in the balance sheet.

Journal entry to be passed for these transactions are:

For Deferred tax asset-

Deferred tax A/c

To Profit and loss A/c

For deferred tax liability-

Profit and loss A/c

To Deferred tax A/c

Tax

A tax is a financial charge levied on a taxpayer of a country by the state or government of that country. Taxpayer can be an individual or a legal entity. It is punishable to nonpayment of tax. It is not a voluntary payment but it is imposed by the government of the country. It comes from the Latin word Taxo.

Taxes are of two types: Direct tax and Indirect tax. Direct tax is that tax which is directly paid by the person on whom it is imposed. Examples of direct taxes are Income tax or tax on the profit of the business. Indirect tax is that tax which is imposed on a transaction. These taxes are levied on the goods and services. This tax is collected by someone from the person who actually bears the tax. The person who paid the tax to the government and the person who actually bears the burden of tax are different in case of indirect taxes. Examples of indirect taxes are VAT, Sales tax, etc.

For what purpose government use tax revenues?

These tax revenues collected by the government are used to fund public works and services. What is the Internal Revenue service? In US, the function of collecting tax is performed by the Internal Revenue Service agency of government.

FICA Tax

Full form of Fica is Federal Insurance Contributions Act. This is a payroll tax in US which is imposed on both employees and employers. The amount is deducted form their paychecks. The amount collected is used for the Social Security Program and Medicare. These both are the social programs in US which provide benefits for the retirees, the children of deceased workers and the disabled.

Who pays the FICA tax?

The FICA tax is paid by both the employees and employers.

What is the Medicare tax rate?

In US, the medicare tax rate in 2016 is 1.45% on the first $200,000 and 2.35% on above $200,000 and social security tax rate is 6.2% which totals 7.65%. there is maximum of social security tax for employers and employees which is $7,347. There is no maximum amount for medicare contribution.

What items on the w2 make up Federal Insurance Contributions Act or FICA?

These are the only two items of which FICA is made up of i.e., Social Security and Medicare taxes.

Payroll Tax

Payroll Tax is that tax which an employer pays on the behalf of his employee and this tax is based on the salary of the employee. There is a difference between Payroll Tax and Income Tax. Both the taxes are based on the employee’s wages or salary. The difference is just who pays the tax. Income tax is fully paid the employee and payroll tax is partly paid by employer and partly by employee.

What does the federal payroll tax pay for?

Federal payroll taxes are paid for Social Security, Medicare and Unemployment Insurance.

What taxes are only paid by the employer?

Federal Income Tax, Social Security and Medicare Taxes, Federal Unemployment (FUTA) Tax and self-employment tax are the taxes paid by the employers for their employees.

Sales Tax

A Sales Tax is a tax imposed by the government of a country on the sales of goods and services. Seller is supposed to collect tax from the consumer of that good and then government collects that tax from the seller. Sales tax is only charged to the end user of the product. Certain goods and services are exempted from the sales tax. Different governments charge different rate of sales tax.

Generally, sales tax is calculated as the percentage of the price of the goods sold. It might be possible that in

country, a state, country and a city sales tax prevails. This might cause to overlap of taxes. In most of the countries, this sales tax has changed and converted to VAT tax. US is one of the rich countries left who still charge sales tax instead of VAT. In most of the developed countries, VAT is charged but some countries like US are left who still charge Sales tax. VAT is the tax which is charged as a percentage of the value added at every level of production of good.

Example:

A cash receipt showing sales tax charged on goods @8.5%

Similar to sales tax or other types of sales taxes are: -

Manufacturers’ sales tax

Retail sales tax

Wholesale sales tax

Excise taxes

Gross Receipt Taxes

Use tax

Value added tax

Fair Tax

Turnover Tax

Securities turnover excise tax

Sales tax rate is different in different countries. In US, sales tax is charged by states. In 2015, all the 38 states collected sales tax from its citizens. But in 2017, 5 states do not levy a sales tax. Sales tax in other states varies from 4% to 10.5%

What is the meaning of Value Added Tax (VAT)?

Value Added Tax is a type of general consumption tax. This tax is levied whenever there is value addition at any stage of production. This tax is most often used in EU (European Union). VAT is based on the taxpayer’s consumption of goods rather than his income. This tax is used by more than 160 countries. Vat has widely replaced the Sales tax in many countries. Most of the developed countries uses VAT. There are two methods for calculating VAT: - the credit invoice or invoice based method and the accounts based or subtraction method.